When it comes to affordability of life insurance, it needn’t be all or nothing. There are a number of strategies that can be employed to help make insurance an option for more clients, and as CommInsure’s Tim Browne writes, perhaps it’s time to get back to basics with product design.
Over the past decade insurance products have become far more complex, with more features and definitions. As a consequence, the extra ‘bells and whistles’ have each brought with them incremental cost that ultimately affects the cost of insurance contracts.
I’m beginning to wonder if these additional items are aligned with the current economic environment and the financial pressures being experienced by many clients.
Our latest research1 found that Australians would be most likely to put a $1,500 windfall towards savings (39 per cent) or bills (37 per cent); with just 2 per cent using it to take out insurance and just 1 per cent indicating they would top up their existing cover.
There is no escaping the fact that consumers today are more concerned with making ends meet, and as such, a low-cost simple product that delivers only essential items may be the order of the day.
It has never been more important to receive advice because of the increased range of product options and changes in the economic climate, but we must also consider where compromises can be made.
In tough times, what’s the first thing to go? Among other so-called ‘non-essentials’, it can be insurance.
From the consumer’s point of view, the insurance renewal is presented by the industry as binary – you either pay or you do not pay.
But for those in financial difficulty, there are a number of choices.
Within your business, if clients experience financial hardship, how do you present their options? Here are some options that may be better than life without personal insurance.
The first area to consider is removing desirable but non-essential features and benefits.
In today’s economic environment, providers typically have a basic contract option and a platinum or plus equivalent – this is where the bells and whistles come into play.
Normally the core benefits are the same, but clients pay extra for ancillary benefits. It’s important for clients to check exactly what is on offer. For example, with income protection, a crisis benefit may be offered.
However, if they have a good trauma policy, is there really a need for a crisis benefit?
Further, for income protection, you may increase the waiting period. The options are from 14 days to 30, 60, 90, and 180 days. The most common option is 30 days but you may choose to push this out.
Secondly, you can review the level of cover. For clients with affordability concerns, you may consider reducing the sum insured – some cover is better than no cover. You might also reduce the benefit period – for example to two or five years rather than to age 65.
The third option centres on packaging cover through super. Taking insurance out within super is a popular option to address issues of affordability, since a tax deduction is usually available on contributions, and the premium does not impact a client’s cash-flow.
The issue here, however, is that many Australians take a set-and-forget approach regarding insurance inside super and may have a false sense of security over what cover is in place.
Our research found that almost half of Australians with life cover took this out through their super fund with no advice, and only one in five have ever topped this insurance up.
Over half of those with income protection hold this through super and less than a fifth have ever topped it up. That said, holding income protection outside of super can provide advantages.
Because tax deductions can be claimed for premium payments, the effective cost of cover is reduced – for top rate taxpayers to only 53.5 per cent.
In addition to these, advisers can look at definition options for clients.
For income protection, agreed value definitions versus indemnity may be considered. Agreed value are more expensive but provide more certainty at claim time so there is a trade-off to bear in mind, particularly for the self-employed.
For total and permanent disablement, the consideration is whether to take an own occupation versus any occupation definition. Any occupation is usually cheaper but it can be more stringent when it comes to claim payment.
Lastly, clients can also weigh up level versus stepped premiums. The choice here depends on the time horizon: level is cheaper over the longer term; stepped premiums start off lower but then increase over time, based on age.
In an ideal world you would not be forced to make any compromises when it comes to matters such as personal insurance.
However, the current economic environment requires flexibility, and one of the most important skills for an adviser will be the art of compromise.
1CommInsure Life Risk Survey 2012. CommInsure commissioned CoreData to conduct this survey in August 2012. 1,078 Australians – aged 18 and over – were polled.
Tim Browne is general manager - retail advice, CommInsure.